The Monetary Board decided today to keep the BSP’s key policy interest rates unchanged at 6.75 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.0 percent for the overnight lending or repurchase (RP) rate. The BSP’s policy rates were last changed on 2 July 2003 when the rates were cut by 25 basis points.
The latest assessment by the Monetary Board suggests that the outlook for inflation in 2004 remains consistent with the 4-5 percent inflation target for the year. However, supply-side factors such as transport cost adjustments, utility charge increases, and rising energy prices continue to dominate the risks to the outlook for inflation in 2005 and point to a possible uptrend in average inflation above the 4-5 percent target. However, the Monetary Board is of the opinion that the expected inflationary pressures over the policy horizon do not represent permanent shifts in the long-run price path and therefore should not require a monetary policy response. Inflationary pressures resulting from supply-side factors are largely outside the influence of monetary policy and therefore do not require action from monetary authorities.
At the same time, the Monetary Board believes that the overall likelihood of significant demand-driven pressures on consumer prices developing in the near term remains low given continued evidence of double-digit unemployment, spare manufacturing capacity and modest bank loan growth. Indeed, the Monetary Board is of the opinion that the continuing patterns of sluggish credit demand and modest investment growth suggest that the policy stance should continue to support the real sector and provide adequate stimulus to credit activity. The weak trend in investments constitutes a downside risk to the sustainability of output growth in the medium term, and such a risk calls for a need to exercise caution in considering possible adjustments in policy rates in the future. Possible wage adjustment which could affect the demand for money has been factored into the inflation models to the extent of 9 percent starting July 2004 and 4 percent in July 2005.
Given the above considerations, the Monetary Board believes that the present stance of monetary policy is fully consistent with the expected path of inflation over the next two years. In the near term, the BSP will continue to monitor closely all developments that may affect the outlook for inflation and inflation expectations over the policy horizon.